Markets remained fairly sanguine over the last week, with U.S. equity indices largely ignoring high-profile headline events. The resumption of geopolitical concerns, after North Korea launched a missile over Japan and a spike of gasoline futures on refinery closures caused by Hurricane Harvey were not sufficient to derail the S&P 500, which ultimately ended the week more than 1% higher. Despite this positive momentum, looming political battles over the budget and tax reform, still lofty valuations, and seasonal headwinds make us doubtful that markets can meaningfully appreciate from current levels.
On the political front, the Trump administration is ramping its efforts to achieve tax reforms/cuts by the end of the year. At a speech in Missouri on Wednesday, President Trump laid out the broad outlines of the White House’s goals including cutting the corporate tax rate to 15% and closing special interest loopholes. The effort, spearheaded by Treasury Secretary Mnuchin and Economic Advisor Cohn, may be complicated, however, by contentious negotiations on the budget and debt ceiling (which must be raised in September). At this point, markets have largely discounted the ability of the administration to achieve reforms on the tax front, meaning a successful effort could serve as an upside catalyst.
Looking forward, 3Q earnings growth is currently expected to be ~5%; a sequential slowdown from the 13% and 10% logged in 1Q and 2Q respectively. This year’s strong growth, after 18 months of an earnings recession, will make for tough comps next year. Despite this, revisions for next year are holding firm. It is also worth noting that tomorrow marks the beginning of September, which has historically been a seasonally tough period for markets. It is normal to see a period of consolidation until near the end of October, when investors begin pricing in Christmas and 1Q strength.
The recent improvement in price action among U.S. indices could possibly generate additional momentum in the near-term, but as we detailed above there are several events on the horizon that are likely to hamper a meaningful move higher. Additionally, the lack of volume in recent sessions indicates that major investors are still absent from Wall Street, not surprising as summer winds down, making any moves suspect. One bright spot is that valuation has retreated to just below 19x. Although still lofty by historical standards, higher P/Es are common in a low inflationary and interest rate environment.
Economic data releases from the U.S. over the prior week were mostly positive, lending support to equity valuations and the “global growth” narrative. Of particular note, the Conference Board Consumer Confidence read for August came in above expectations, at 122.9 vs 120.7, posting its second highest level since 2000. The ADP Employment Change (August) also beat forecasts, potentially foreshadowing a better than expected Nonfarm Payrolls (August)number tomorrow, while GDP Growth (2Q) was revised upward to 3%. This was the first time quarterly GDP growth came in at 3% or better since 2015.
Economic data reported in the past week (actual vs estimate):
Headline Durable Goods Orders (Jul P)- -6.8% vs -6%
Core Durable Goods Orders (Jul P)- 0.5% vs 0.4%
Capital Goods Orders (Jul P)- 0.4% vs 0.4%
Capital Goods Shipments (Jul P)- 1% vs 0.2%
Wholesale Inventories M/M (Jul P)- 0.4% vs 0.3%
Dallas Fed Manufacturing Activity (Aug)- 17 vs 17
Conference Board Consumer Confidence (Aug)- 122.9 vs 120.7
MBA Mortgage Applications (Aug 25)- -2.3% vs -0.5% prev.
ADP Employment Change (Aug)- 237k vs 185k
GDP Annualized Q/Q (2Q S)- 3% vs 2.7%
Personal Consumption (2Q S)- 3.3% vs 3%
GDP Price Index (2Q S)- 1% vs 1%
Core PCE Q/Q (2Q S)- 0.9% vs 0.9%
Initial Jobless Claims (Aug 26)- 236k vs 238k
Continuing Claims (Aug 19)- 1942k vs 1951k
Personal Income (Jul)- 0.4% vs 0.3%
Personal Spending (Jul)- 0.3% vs 0.4%
PCE Core M/M (Jul)- 0.1% vs 0.1%
Chicago PMI (Aug)- 58.9 vs 58.5
Pending Home Sales M/M (Jul)- -0.8% vs 0.3%
Consumer Confidence (Aug F)- -1.5 vs -1.5
Unemployment Rate (Jul)- 9.1% vs 9.1%
CPI Estimate Y/Y (Aug)- 1.5% vs 1.4%
Disclaimers and Disclosures
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